by Varun Gauri

When the Federal Reserve Bank raises interest rates to fight inflation, rates rise worldwide, and debts in developing countries become more difficult to service. The consequences for low-income countries can be severe. For instance, When Paul Volcker decided in the early 1980s to push the prime rate over 20%, he triggered a debt crisis in the developing world, causing catastrophic unemployment and poverty. The impact on Latin America exceeded that of the Great Depression, and was by some measures the worst financial disaster the world has ever seen. The ensuing cascade of poverty across Africa coincided with the emerging HIV/AIDS crisis, causing widespread misery. For instance, life expectancy, usually rising in the modern world, went, in Zimbabwe, from 61 years in 1984 to 48 years in 1997 (the interest rate shock was not the only cause). As historians note, a similar dynamic had played out in the 1920s, when the world’s main central banks raised interest rates, causing the price of grains and energy to become unaffordable for millions in colonies and low-income countries.
The practice continues. Recently, the covid pandemic, inflation, and the Russian invasion of Ukraine have pushed an estimated 75 million people into poverty. In this context, the Fed has been raising interest rates to bring down a mix of demand-led inflation, rooted in sectoral imbalances following the covid crisis, and supply-shock inflation, arising from the Russian invasion of Ukraine. The Fed’s aggressiveness is perilous for the poorest people in the world, and the warning signs of developing country debt crises are again flashing. Read more »










Flor Garduno. Basket of Light, Sumpango, Guatemala. 1989.


In 1965, John McPhee wrote an article for The New Yorker titled “
